Bailing Out the Auto Industry

My head tells me there is not one good reason for Congress to provide bridge loans to the auto industry. Its problems are systemic problems and have existed for years and years and years. Auto workers currently make in excess of $72.00/hour, including all benefits. A Honda worker makes $44.00/hour…and the average industrial wage is $18.00/hour. Legacy costs added onto each automobile cost Detroit approximately $4,000.00/car, an expense not borne by foreign autoworkers doing business in the United States. In addition, the auto industry has consistently made bad decisions relating to model mix, and for years made a shoddy product compared to its foreign counterparts.

These systemic problems caused American automakers to promote gas guzzling, massive SUV’s because the foreign automakers would not compete in the category, and the Americans could make a profit on those types of vehicles. That desire for profit was not driven by ordinary business practices, but rather by a need to pay those massive legacy costs and comply with union obligations. The sole raison d'etre for the American automobile industry was to pay for retirees’ health care and way out of proportion salaries from the executive suite to the assembly line.

For the past several years, we have watched Ford and GM (forget Chrysler) struggle to get out of that box. Dual salary structures, union takeover of pension obligations, hammering suppliers like Delphi into bankruptcy…the efforts went on and on…and none of them worked. When energy prices skyrocketed, what little support there was for the existing business plan collapsed as SUV and truck sales tanked. The execs and UAW president have been in Washington all week claiming it was the financial crisis that has trapped them. No, it wasn’t. It was $4.00/gallon gasoline and the inability to compete with foreign manufacturers who already producing fuel efficient cars in the United States that has sunk the auto industry. They were hanging onto the rail by one finger, and that finger got hammered in the financial collapse.

Why should the rest of us, many of whom don’t buy their cars, and many of whom are struggling to put food on the table let alone make $72.00/hour, bail them out with our tax dollars? For politicians, they want the votes in Michigan and Ohio. But where does the benefit accrue to the Honda driver that goes to work at McDonald’s to make $10.00/hour, if that?

I used to own GM stock, and I continually heard the rosy scenarios relating to the company’s future. In light of the current situation, those making the claims were either lying or very stupid. I finally got out 2 years ago. I had hoped that the Chevy Volt would provide a catalyst to make GM profitable again. I was thrilled that the government saw fit to provide loans to GM for the development of fuel efficient cars like the Volt. I truly believed, as I wrote several weeks ago, what’s good for General Motors is good for the USA.

Maybe what’s good for General Motors, and Ford and Chrysler, is to file for Chapter 11 bankruptcy with the government providing the needed bridge loans allowing them to keep operating, while using the courts to enforce badly needed reform in the industry. It will be painful and scary and not cheap to the taxpayer as the government wrestles with how to deal with pension funds and health care. It will be a messy business.

That is what my head tells me. Why does my heart tell me something different?

Photo Courtesy Flickr Common Attribution: Derek Farr; Some Rights Reserved